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What I Heard from a Government Official in a Small Tax Haven

By Tom Dyson, publisher, The Palm Beach Letter
Wednesday, June 4, 2008

There was a knock at the door. A soldier entered the room and raised his arm in salute. Then he drove his boot heels together to produce a loud snap. He waited for the politician's attention...

I studied the soldier's crisp brown uniform. It looked like something you'd wear to a dress party. His black patent leather shoes matched his belt and the peak of his hat. The gold buttons on his sleeve were so shiny they could decorate a Christmas tree.

The politician turned to the soldier. He took a whispered message. Then he dismissed him with a flick of the wrist...

Tito Saguier is a senior member of Paraguay's government. Last week, Tito invited me to the senate for a cup of coffee and a discussion about Paraguay's future.

Soldiers escorted us everywhere we went. Other soldiers opened doors and saluted as we walked past. A female soldier stood at attention at the door to Tito's office. She wore the same pressed uniform as the male soldiers, except, instead of trousers, she wore a mini skirt with knee-high Nancy Sinatra boots.

Paraguay has a new government. It just won power. The old government held power for 61 years. I wanted to know how this new government would behave. Would those in power continue to steal? Would they decrease the size of government? Would they decrease regulation and taxes?

An investor has several reasons to take a close look at Paraguay... Itaipu is the world's largest hydroelectric dam. Thanks to Itaipu, Paraguay generates 10 times more electricity than it needs. Per person, Paraguay has access to more free energy than any other country on Earth. This energy will never run out... and it's clean.

There are few taxes in Paraguay... and a small government. It has no external debt and no currency restrictions. The Paraguayan currency – the guarani – has risen almost 50% against the dollar in the last couple of years... and is the best performing currency in the world this year.

Paraguay has this interesting geographical location right between Brazil and Argentina. Both of these countries have huge populations compared to tiny Paraguay. Paraguay can make a fortune trading with both. Plus, Paraguay is a member of the Mercosur, the free trade agreement that also includes Brazil, Argentina, and Uruguay. Goods produced in Paraguay are not subject to Brazilian and Argentine tariffs.
 
Paraguay is very cheap and unknown. There is no industry, and the stock market is tiny. And there's a potential trigger for a rally: The Argentine government has raised export duties on soybeans to 40% and banned the export of beef. I found evidence Argentine farmers are about to rush into Paraguay, where ranchland is cheap and the politicians don't steal their profits.

Unfortunately, I didn't get the answers I was looking for from Tito Saguier. At one point, I asked him for details on Argentine and Brazilian import duties. He didn't have an answer. He wasn't familiar with the trade terms of his neighbors.


I think Paraguay is ripe for investment. Let's hope the government doesn't get in the way...And he was full of bland generalizations. "We want to increase economic production... and encourage foreign investment," he would say without any further explanation.

Good investing,

Tom




Market Notes


GOLDCORP: THE PICTURE OF A BULL MARKET

It's a quick task to keep an eye on large-cap gold mining. Just a handful of companies sport market values above $10 billion. Near the top is Goldcorp.

Goldcorp is one of the largest and best-managed gold miners in the world. Most of its assets reside in Canada – one of our favorite destinations for resource investment. As you can see from our chart today, this bellwether is exhibiting the signs of a bull market.

A bull market is defined by its tendency to make "higher highs and higher lows." Goldcorp's chart below is a classic example. Since correcting down below $22 a share last year, Goldcorp now sits at $40. Each rally reaches a little higher than the previous one. Each decline fails to reach previous lows.

Our colleague David Galland put it in simple terms back in March. After years of digesting higher production costs, big gold miners are reaping the benefitsof $900 gold. Cash flow is increasing... and it's a bull market in gold stocks.



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